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WSJ: The Myth Of Indian Realty

Harsh Joshi at The Wall Street Journal:

Low interest rates, a rapidly recovering economy, and India’s never-ending demand for housing: it all adds up to a convincing case to invest in the Indian real-estate sector.

But here’s an eye opener: prices haven’t substantially recovered after a correction which ended six months ago. In fact, except in pockets of demand like Mumbai and to a lesser extent New Delhi, demand for residential properties remains weak.

Even in the big cities, the pace has slowed after a brief six-month sprint, amid a flush supply of homes and prices that remain out of reach of many buyers.

Research firm Liases Foras notes that new residential-unit sales in Mumbai peaked in the June-end quarter, at about 20,000 units, with turnover down to 11,000 units by the fourth quarter of 2009.

"At current price levels, it’s tough to sustain the momentum, leave alone increasing it," says Pankaj Kapoor, the firm’s managing director. It’s no surprise, then, that developers are wary of trying to raise prices. Conditions will become only more challenging if, as expected, India’s period of low interest rates comes to an end.

There are signs of lower cost housing – the Gurgaon/Delhi Radio Networks are flush with ads like “buy a house for 23 lakhs in Ghaziabad” etc. (They might forget to tell you cement is extra, the location is closer to China than Delhi and so on) And there are teaser rates from all sorts of banks – I heard of a recent offer of 5% for the first year! (Another post on that)

The figures that the real estate companies provide this quarter and the next should give a better picture. The WSJ article may be just an early indicator that it’s not all roses out there.

Like the author notes later in the article, Real Estate stocks have jumped back; and many more IPOs are in the offing. Will the market turn around just as they list? Or will that IPO gong be their death knell?

  • Amit says:

    >I totally agree with your post & the trend is not only in Metros, its the same in small towns. The builders have increased rates but theres hardly any transaction happening. And added to that the property dealers are making it even worse. Lets see who bows first – the buyers or the builders.

  • Arghya says:

    >I have one simple question. Are there any low cost housing? I strongly agree with Deepak’s view — (They might forget to tell you cement is extra, the location is closer to China than Delhi and so on).

    I am watching the prices of new launches as well as getting quote from property dealers for resale; I could not find any visible change in prices. The property price was stuck at the same level for a while but it has again jumped up. I don’t know how!!! In gurgaon, I don’t know how they are evaluating the cost of a 2BHK flats(~1500 Sq. ft.) which are near to proposed metro link(expected year 2020) at more than 50lac. All new launches coming on golf-link extension road where there no sign of life so far, are asking more than 50lac for a 2BHK with an expected delivery within 3 year!!! I don’t see any price dip in Gurgaon.

    Then I question myself how long they are going to sustain such price??? According to me there would be nothing like subprime fiasco in India. Price will hardly fall down; at best it could be stuck at certain level. Why?

    Main reason is Black-money. India has completely different economy. I think price of real estate in India is not guided by demand-supply, rather the amount of black-money in the economy. Real estate works like inventory of black money. The buyers are mainly investors with black money who don’t bother about the return or rental income. For these people valuation has no meaning, they just need a way to park their money which they can’t store anywhere else. These people would buy anything at any price – thus creating demand. And there are plenty of people with plenty of black-money to sustain such virtual demand for years. Once a property is bought for inventory purpose, there is absolutely no urgency to get the output, you can demand as much as you want, even though you know that there would be no buyer at that high price. Now if the counts of such incidents are more than 50%, we are getting an artificially inflated price tag which has no reason to go down.

    The solution is to have restricted growth of black money; which I don’t see to happen in near future.

  • Anonymous says:

    >Deepak, I cant believe you too can make a mistake like this. Harsha from WSJ – I have no idea why he writes a piece like this.

    One simple sentence and I'll let you think: "Stock Prices summarise FUTURE cash flows". How many more decades will people fall into the trap of "explaining" a stock price based on what has happened / or whats happening?

    Mr Dalal

  • Deepak Shenoy says:

    >Arghya – It will change as supply increases, and we urbanize. Will take time but is sure to happen.

    Dalal: Stock prices summarize sentiment. Future cash flows have nothing to do with the stock price – in fact nothing in the "future" does – it's all a matter of how well people think the stock has done or will do. Most likely, both. It's obvious markets aren't efficient, and will probably continue not to be so for a really long time!

  • Anonymous says:

    >Deepak, your response to my comment belongs to slide number 6, "common investment pitfalls" in Investing 101.

    seriously, you said " Stock prices summarize sentiment. Future cash flows have nothing to do with the stock price – in fact nothing in the "future" does – it's all a matter of how well people think the stock has done or will do."
    will do – is that not the future?

    and, just so u dont miss it, i never said markets are efficient.
    Mr Dalal

  • Deepak Shenoy says:

    >Dalal: Selective Recall 🙂 The part you missed was "Most likely both". Sentiment is based on both past and future. And future cash flows is not equal to what people think of the future – in fact for some players, the company could remain cash flow negative forever, for all they care!

    I assumed you implied efficiency by mentioning future cash flows. Apology if that wasn't the case.

  • Arghya says:


    Yes you are right. It will change as supply increases, and we urbanize. But there is a big IF. IF supply increases. IF we urbanize.

    At the best case all real-estate companies with huge debt would go bust and smaller ones would go out of business. Result is decrease of supply but not price fall.

    Question is how present supply continues to grow? I had a chat with Ardee City sale agents in gurgaon (They have a huge, completely ready mall at the entry which has not opened for last 3 years). They were asking over 50 lac for a 2 BHK which is supposed to come up in next three years(Communication is a real pain in that place). There were skeletons of 3-4 multistoried building in front of their office. I asked them — Are you talking about these buildings? They laughed and told me that those have been sold 3 years back. (Watching the progress of construction I realized that no way one can get possession in next two year). Anyway just for curiosity I asked – Do you have any idea what is the percentage of investors and real buyers? He said – Investors are not their anymore. They have gone out long back when the skeleton was only 5-6 storied. And on new launch they have already sold 30-40%. He also told me investors usually don’t take loan, they go for construction linked payments, which make sense.

    So I think those 30-40% sales are contributed by investors only. There are hardly any genuine buyers. But it works well for everybody. Realtors recover most of its investments even before it could decide the spot of excavation. Investors hopes for a road to come up beside the building when construction is half finished, so that they can get out with a considerable white money as appreciation and huge chunk of black money along side. The resale buyers are mainly with money which they can’t reveal to anybody is also happy with their investment.

    Anyway, point is realtors find no problem to sell at least 50% even before construction starts. So I don’t think price is going to have sharp fall. Small construction companies would be excluded from the industry. But there would no gains form the distressed sale for genuine buyers. Because the bankrupt company would prefer to sell in bulks to big construction companies or to other corporate rather than selling piece by piece. And obviously the new buyers would be the ones who have capability to hold on their investments.

    And for urbanization? Lets hope that at least one political person work for wellbeing of nation.

  • Deepak Shenoy says:

    >Arghya: Points noted, and yes, I agree, the concept hinges on whether expansion happens. Gurgaon is strange that way, brokers don't like to sell ready properties since they make a lot more on the upcoming ones!

    The thing is that the situation you describe has applied in India for a very long time, yet property has fallen 20-30% in the past. If the India growth story slows or falters…

  • Achin Jain says:

    >I bound to agree with all the things and want to point to another point related to same.
    With the service sector growth, there is lot of easy money and easy credit that are coming in. Folks are getting things in very easy and they are going on spending spree. Be it clothes, food, gadgets, flats etc.
    I would rather say easy money along with black money is major contributor in this.

    Things in Pune are no better. Prices hardly had dipped (in so called recessions in India) but have sharply increased in last 4months.